Is it the end of the line for the Internal Revenue Service’s “Return Preparer Initiative”? A year after the plaintiffs in Loving v. IRS prevailed in the D.C. District Court against the agency’s proposed licensing regimen, the U.S. Court of Appeals has now affirmed the permanent injunction.

‘Vast expansion of authority’: The IRS’s initiative is an effort to regulate independent tax preparers by requiring them to pass a competency test, receive continuing education, and pay annual fees. It does not apply to attorneys, CPAs, or IRS enrolled agents who are already licensed. The agency has claimed it has the authority to do so under an 1884 statute (31 U.S.C. § 330) and justified the measure as a response to problems in the tax-preparation industry.

Three independent tax preparers filed suit to prevent enforcement of the rules that, they claimed, would put them out of business. In January 2013, the district court agreed. Now, the appeals court affirmed in a decision that came down to interpreting the statute’s key terms. It pointed out that, for the first 125 years after the statute’s enactment, the executive branch never interpreted the statute to authorize regulation of tax-return preparers. In fact, in a 2005 hearing, the National Taxpayer Advocate—“the government official who acts as a kind of IRS ombudsperson”—testified in front of Congress that “the IRS currently has no authority to license preparers or require basic knowledge about how to prepare returns.” Suddenly, in 2011, the IRS decided it, in fact, did have the power, said the court.

“If we were to accept the IRS’s interpretation of Section 330, the IRS would be empowered for the first time to regulate hundreds of thousands of individuals in the multi-billion dollar tax-preparation industry.” Nothing in the text of the statute or the legislative history provides for “that vast expansion of the IRS’s authority,” the court concluded.

It’s not clear what the IRS plans to do next. The IRS’s newly installed commissioner, John Koskinen, has suggested the agency might offer certification on a voluntary basis. The idea is that consumers would ask their tax preparers whether they had gone through the IRS training—and favor those who had. Not surprisingly, tax return preparation services, including H&R Block, reacted with displeasure at the outcome. "It is outrageous that all consumers don't enjoy basic protections with such a significant financial transaction as tax preparation," the company’s CEO said.

Tax preparers should note that the requirement for a paid preparer to obtain a PTIN and include it with all prepared returns is separately authorized in Section 6109 and is not being affected by the Loving case. The case is Loving v. IRS, 2014 U.S. App. LEXIS 2512(Sept. 25, 2013).